Doing Business 2011: 8 years, 11 indicators, and a new 5-year cumulative score

The new Doing Business 2011: Making a Difference for Entrepreneurs report has just been published, the 8th in the Doing Business series. Let me quickly dispense with the most-watched metric, the 10 economies that have improved the most on the overall Ease of Doing Business index during the last year. This year it's Kazakhstan, Rwanda, Peru, Vietnam, Cape Verde, Tajikistan, Zambia, Hungary, Grenada, and Brunei Darussalam.

Of course, whether an economy manages to pull off a series of regulatory reforms in a single year requires a bit of luck. While policymakers can often cut the days to open a business with relative ease, it's rather more difficult (and more time consuming), say, to increase the percentage of the population covered by a credit bureau. So I was pleased to see that the Doing Business team has drawn on their longitudinal dataset to construct a measure of cumulative change for the past 5 years—the "DB change score". (Click on the figure below to see a bigger version.)

Following this metric, we get a somewhat different group of economies that have consistently reformed their business regulatory environment: Georgia, Rwanda, Belarus, Burkina Faso, Saudi Arabia, Mali, Kyrgyz Republic, Croatia, and Kazakhstan. There's some overlap between the one-year measure and the five-year measure, but the 5-year measure features a larger contingent from Eastern Europe and Central Asia, reflecting the fact that this region has consistently been the most aggressive in pursuing regulatory reform.

I suspect that this year, as in past years, some folks will reasonably ask some version of the following questions: "If (country X) has done so well in the Doing Business report, why has (country X) suffered so much during the financial crisis? And why has (country Y) done so well when it hasn't reformed its business regulatory environment?" Put very simply, the Doing Business reports don't measure everything that matters for economic growth, nor do they aim to. Things like proximity to markets, the stability of financial systems, the rise and fall of commodity prices, etc., all have an impact as well.

That said, I would be quick to point out that noone really knows exactly in what order which ingredients have to be mixed together to achieve economic growth. Even the Commission on Growth and Development came to this conclusion. Nevertheless, we do have bits and pieces of evidence that point to the importance of reforming the business environment. The evidence is strongest on the impact of business entry reforms (i.e. cutting the costs and procedures to open a business). For instance, one study looked at the impact of the introduction of one-stop shops in Mexico and found that the number of registered business increased by 5% after the reform. This short Viewpoint provides a summary of the evidence in this area.

How can researchers make progress on these issues? In my view, there is a gap that needs to be bridged between two schools of research: the body of econometric research on business environment that tries to make generalizations based on the average impact of reforms, and the Ricardo Hausmann/Dani Rodrik "growth diagnostics" school of thought that tries to identify the binding constraints in particular economies. In some cases, the binding constraint may be found in the business environment, and policymakers are right to expend limited political capital on these types of reforms. In other cases, other aspects of the economy may be holding growth back, e.g. a repressed banking system or low educational attainment. It would be helpful to provide policymakers advice on how to identify when the business environment is the key binding constraint. Together with companion datasets like Investing Across Borders, Enterprise Surveys, and Women, Business and the Law, this should be within reach.

Comments

Why was the "Employing Workers" index dropped from the overall index and is published only in the appendix? This makes the data non-comparable to last years'! Countries like Spain improve over 20 ranks just because you guys decided to drop that index. I checked the report and see no explanation of why this decision was made. Can you help me?

Hi Jonathan,
I had the same question when I first read the report. In fact, the calculations of most improved economies were made in an apples-to-apples fashion. If you check page 4 of the DB2011 report (http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/annual-reports/english/db11-fullreport.pdf), you'll see that the footnote indicates that data from DB2010 presented in DB2011 was back calculated to exclude the Employing Workers Indicator. Based on the other 9 indicators, Spain fell one rank from 48 to 49.
As for why the indicator was removed in DB2011, have a look at page 16 of the report. My understanding is that after a period of consultation, the indicator will be added back into the overall rankings:
"Because the consultative process and consequent changes to the methodology are not yet complete, this year’s report does not present rankings of economies on the employing workers indicators or
include the topic in the aggregate ranking on the ease of doing business."

Ryan,
as me being one of the folks who asked the questions in the past I thank you for your well-balanced introduction of this year's Doing Business, the important questions you raise and the questions for further research and tasks for policy advice you identify.
@Jonathan: You can find some more explanations why the "Employing Workers" index was dropped
here: http://www.house.gov/apps/list/press/financialsvcs_dem/press042809.shtml and here: http://www.eurodad.org/whatsnew/articles.aspx?id=3608

The “Employing Workers” indicator is the most important indicator of them all. Spain’s 20% unemployment rate exists because of the rigidity of those laws. Trade Unions, socialists and now the World Bank believe that those rules against dismissals help to fight unemployment. But what happens is totally the opposite. Since that to hire a worker is almost a pact for life companies tend to hire the minimum workers possible. What creates huge unemployment rates.
Anyone knows about others similar rankings to use? I can't use Doing Business at my studies and work anymore, it's completely useless.

Ryan,
The "Employing Workers Indicator" won't be back. And the reason is:
"ITUC general secretary Sharan Burrow invited the Bank to complete the process of overhauling Doing Business. “By considering labour regulations only from the view of whether they are deemed to be good for business, the World Bank has caused enormous damage to workers by advising borrowing countries through its highest-circulation publication that labour standards should be dispensed with,” said Burrow. “The global economic crisis has made clear that well-designed and enforced labour regulations and social protection are essential for securing employment and for providing adequate income for those who lose their jobs. The Bank should carry through on the positive step it has made in Doing Business 2011 by removing the EWI from all future editions and, instead, adopting policies on labour issues that recognise and reward the importance of adequate labour regulations and comprehensive social protection.”
http://www.ituc-csi.org/ituc-calls-on-world-bank-to.html?lang=en

Hello Ryan,
With an impression of the progress so far made by Doing Business in fulfilling its mission, I thought of making this comment with a suggestion for further improving the future editions.
As can be seen from Doing Business country case studies, as well as the news coming from certain countries with regard to their law & economic reforms, governments have been keen to give effect to the policy implications suggested by DB, as well as to get a higher country rank in the report. It is certainly a positive indication, given these countries pay equal attention to the limitations of DB as well. That means, as you have clearly indicated, DB is limited in scope, i.e., focused on the formal sector; and measures a selected set of factors as the ‘ease of enterprise’ indicators. Therefore, as you have further mentioned, “gaining a fuller understanding of the broader business environment requires combining insights from DB with data from other sources, such as the World Bank Enterprise Surveys” (DB-2011, p.13).
The statistics on global informality as referred to in Doing Business enlightens policy makers on the importance of considering its limitations of scope.
In this context, one can reasonably guess that the social cost of ignoring the limitations to DB’s scope by any ‘reforming country’ may exceed the social benefits that can be gained by giving effect to its policy implications. For instance, paying less attention to issues that are unique to the informal sector such as the lack of legally marketable title to property (vis-à-vis the ‘Registering Property’ indicator of Doing Business), and the incapacity/ lack of knowledge to contract (vis-à-vis the ‘Enforcing Contracts’ indicator of Doing Business), may increase informality.
Relevance of the ‘Legal Empowerment Agenda’
As you are aware, the ‘Renewed Anti-poverty Agenda’ of the UN (passed by Resolution No.A/RES/64/215 of 2009) is based on the recommendations made by the Commission on Legal Empowerment of the Poor (2005- 2008) which was co-chaired by former US Secretary of State Ms. Madeleine K. Albright and the Peruvian economist Prof. Hernando de Soto. The President of the World Bank has functioned as a member of the Commission’s Advisory Committee. In their final report titled ‘Making the Law Work for Everyone’, the Commission calls for action from multilateral agencies including the World Bank to integrate the Legal Empowerment Agenda as a core concern in their work. The said report envisages that such action at the international level would facilitate the achievement of Millennium Development Goals that presently suffer a setback from global financial, food and climate crises.
As the said report indicates, legal empowerment is the process through which the poor become protected and are enabled to use the law to advance their rights and interests, vis-à-vis the state and in the market. It involves the poor realizing their full rights, and reaping the opportunities that flow from that, through public support and their own efforts as well as the efforts of their supporters and wider networks. As a poverty reduction strategy, legal empowerment envisages more equitable distribution of opportunities for participation of the poor in economic growth (inclusive growth). Legal empowerment is not just emancipating the poor: it also offers greater prosperity and security for the society as a whole.
The Four Pillars of Legal Empowerment
Access to Justice and the Rule of Law stand as the first pillar of legal empowerment. It is also the fundamental and enabling framework for legal empowerment. The three other pillars -- property rights, labour rights, and business rights -- are to be treated as three equally important areas of fundamental human rights. It is interesting to see how differently (from conventional literature) the Commission has interpreted these four points in the backdrop of the massive scale of the problem that the Commission was entrusted to address. Four billion people across the globe are excluded from the Rule of Law, as the Commission estimates, and this aptly justifies the mission of the Commission as well as the contents of their report titled ‘Making the Law Work for Everyone’.
In the circumstances, I would like to suggest you to include the Legal Empowerment Agenda as a complementary initiative in the future editions of Doing Business. I believe that such an approach would help countries to successfully implement the policy recommendations of Doing Business in order to achieve a more equitable and inclusive economic growth.
Thank you
Dilum Abeysekera
President & CEO
LexEcon Consulting Group NZ Ltd